Budget 2012: Government should go for bold measures

The politically most sensible choice on the forthcoming Union Budget is also what good economics dictates: strong fiscal consolidation, including scrapping irrational subsidies, and sensible policies on tax focusing on administrative efficiency rather than on rates.

Knee-jerk responses to the Congress' electoral debacle in Uttar Pradesh and losses in Punjab and Goa have written off the central government's ability to be bold.

This is not very logical. On the contrary, its poll setback makes it all the more imperative that the Congress should focus on ensuring a favourable economic climate by the time parliamentary elections come in May 2014.

Why should the government be timid? No party wants to bring on a mid-term poll, save the Trinamool Congress, whose leader has managed to turn uncritically supportive media against her in a very short period of time. The BJP's performance has been as bad as that of the Congress and it suffers from intense infighting at the top - witness the failure of its 'star campaigner' Narendra Modi to set foot in UP during the elections.

It has no interest in precipitating early elections, particularly with Karnataka in a complete mess. Mayawati certainly would not favour early elections and would strongly counter any move by TMC to destabilise the Centre. If the Trinamool wants early elections, it stands to reason that the Left would equally vehemently not want them. They, too, would work against a mid-term poll.

Even the Samajwadi Party has good reasons not to want to test its popularity in parliamentary elections right now. Lots of people voted the SP to be rid of the Mayawati government. They did not think any other party could do that job as well as the SP. But they would be guided by a different set of considerations when they choose their representatives at the Centre. Why should SP run the risk of tarnishing their golden victory at the state level by throwing up a diminished showing soon afterwards?

The government has the full political authority to do what it thinks is good for the country, so long as it is in office. It will enhance its own credibility by acting boldly.

It is true that the ruling coalition does not have the numbers to push through any legislation, without the Opposition's cooperation. The Opposition is not in a mood to cooperate, and has stalled things like the goods and services tax, which would be a significant piece of reform. So, the government has to look at reform that does not entail fresh legislation. And there is plenty that it can do.

It has to get macroeconomic balance back, to hold inflation down in 2014. Few voters understand the concept, true. But all of them understand price rise. So, those in the government who do understand excess demand have to act tough on the runaway fiscal deficit.

The deficit must be cut and the share of investment in public expenditure stepped up. This would cut excess demand, dampen prices and boost investor confidence. India needs external capital, given its own low levels of financial savings, to boost liquidity, enthuse the stock markets, boost venture funds, private equity and overall investment.

Cutting the deficit without paring growth means slashing irrational subsidies on fuels and fertilisers. Farmers would be happy to accept subsidy cuts if they come along with higher produce prices. And domestic investment in fertiliser would kick off, at long last, reducing imports.

True, cutting fuel and fertiliser subsidies would push up prices in the short run. But that is a one-time impact that would peter out by 2014. Once fuel prices are fully decontrolled, inflation expectationswould come down as well, and the RBI would be able tocut interest rates, again boosting growth.

Speed up the national rollout of fibre-optic connectivity by the Innovation Council. This, by itself, will not allow people to access broadband. The last-mile connectivity will have to be through wireless, for which spectrum is needed. Make more unlicensed spectrum available for free so that people can access the new world of opportunity high-speed broadband opens up. Change MPs' Local Area Development Scheme rules torequire a minimum expenditure on spreading mobile broadband access.

Attach refrigerated freight cars to express trains to the metros, so that fresh fruit and vegetables can be transported from remote areas to both bring down prices in towns and raise incomes for farmers. Offer states cash incentives to scrap the Agricultural Produce Marketing Committee Act that restricts farmers' freedom to sell their produce for the best price on offer.

Authorise state governments to allow foreign investment in multi-brand retail. If Mamata or Mulayam oppose this, they would fight Badal and Nitish Kumar, who see how this would help farmers.

The government should speak sense, not quack. It should walk tall, not waddle. It should walk straight, not be lame. The alternative is to go quietly into the night.